Why, hello, there!
Jimmy here, with a short one (or at least, I’ll think it to be short) since I’ve more to figure out on this topic…
But! Maybe you’ll get some answers to investment questions on your mind or be able to answer some of the following 🙂
When I say “investment”, I mean a stock or similar I’m going to hold for at least 5-to-10 years at least (my retirement horizon).
When I say “unicorn”, I mean what Warren Buffet does: Buy low when the business is quite expected to last long-term (ie decades). That ‘should’ be a rarity in this Bull Market.
What’s a “Bull Market”? It’s a time of elation and high emotion and high prices before a lot of sadness when the prices eventually go back down 😢 Simply, it’s a period of time in the stock market where prices for businesses go through the roof, whether or not the business is good at making money or has the capital to back up the asked-for price. In that, the price-per-earnings (P/E) ratio is typically high.
And lastly, “P/E” is an indicator on how much a company is being sold for vs. how much money it’s actually bringing in. 20 P/E is the rule of thumb for ‘fair price’ when the underlying company is expected to last a long time. 30 P/E is definitely considered high, while 40 or more is astronomical. 10 or less might be considered a steal, especially if the company has the long-term sustainability to flex profitability in the years to come.
Signs of Unicorns 🦄
So what do I look for that is an “investment” “unicorn” in a “Bull Market” (or any market)? A few things:
- A low P/E.
- For me, I have been foolish (we’ll look at that later here), buying company stock that did not have low P/E of at least sub-20. However, they’ve continued to grow in the longest Bull Market run in the last +120 years.
- A dividend.
- Having a dividend means the company will pay me periodically for owning it regardless of the stock price. To me, that sounds like passive income 💲
- Is the name recognizable? Does the company do something very well? Do people talk about it in positive terms and use it on the regular?
- This one’s a little tricky. Is the company earning money in a stable way for more than 5 or 10 years, is it expanded well into the market making it hard for newcomers, and does it have to reinvent product rarely?
To me, a unicorn has <10 P/E (a “-” or no P/E means the company has negative earnings), a dividend, is a popular brand, and has lasted and will last into the future. If so, I’m ready to dump 10% of my cash reserves into it pronto! (Another tip from Warren Buffet.)
I started investing in individual stocks back in November 2015, 4.5 years ago, well before I heard about Financial Independence or Paula Pant or ready up on investing vs gambling.
Buying into Activision, Sony, Microsoft, I was buying into companies that made or financed video games because that’s the world I knew 🤷♂️ The only other thing I kept in mind was to buy when the companies where going down more than 10%. But really, I had no idea 😶
In the last year or so, I bought into more things. More Microsoft, more Delta, more Exxon, more Google, more Tesla, etc. Some have gone up, some down. But I tended to buy willy-nilly just because the company seemed like it would be around forever (except for Tesla, which I thought was way too low a year ago when I saw Tesla cars parked in lines outside my office).
So how did all that perform?
Let me show you how certain things have performed – we’ll forgo looking at individual stocks but at funds or markets as a whole (all from Vanguard, and investment leader [seriously, go read up on them]).
For the following references, I’ll post the 5 and 1 year gains (or losses!) as of July 15th 2020. I’ll also include the current P/E ratios if available.
- My Investments
- 5 yr: +30.01%
- 1 yr: +26.87%
- S&P 500
- 5 yr: +51.72%
- 1 yr: +7.41%
- Vanguard S&P 500 ETF
- 5 yr: +50.40%
- 1 yr: +6.16%
- PE: 31.50
- Vanguard Total Stock Market ETF
- 5 yr: +54.36%
- 1 yr: +6.94%
- PE: 26.15
- Vanguard US REIT Fund
- 5 yr: +1.00%
- 1 yr: -12.26%
- PE: 38.56
- Vanguard Growth ETF
- 5 yr: +94.97%
- 1 yr: +25.25%
- PE: 37.72
- Vanguard International Dividend Appreciation ETF
- 5 yr: +36.29%
- 1 yr: +3.37%
- PE: 22.31
- Vanguard International High Dividend
- 5 yr: +3.40%
- 1 yr: -13.18%
- PE: 11.86
- Vanguard Total International Stock ETF
- 5 yr: +2.31%
- 1 yr: -2.36%
- PE: 17.66
But what does it all mean???
It means I was dumb 5 years ago. As is the common suggestion, put currency into ETFs. (Seriously, do it.) With a heavy leaning to the US, we see the S&P and Total Market Vanguard funds even outperforming the S&P 500 itself. Growth companies have been ridiculous over the last half decade. My investments compare their measly 30% gains with the 50% realized elsewhere.
However, I haven’t done too bad in the last year. While the world has entered a pandemic, I’ve maintained well-above-standard earnings.
Now, I could let this outcome go to my head. “Why yes, I am that smart and can game the system! I gambled on Microsoft and Tesla, why not do the same again?”
Yeesh – May cooler heads prevail…
Unicorns Don’t Exist
I’ve had a good run, yet I’ve proven I perform worse than the market in the long-ish-term.
Now, as P/E ratios of major stock holdings race past 30, past 40, when a rocket-launching electric-car battery company is off the S&P but more valuable than any other business on it, when we near a massive US election in November, when we’re in the middle of a pandemic with millions out of work and hundreds of thousands dead… I am getting cold feet.
“No, Jimmy! Listen to Buffet! Buy stock for life! Don’t try to time the market!”
OK, fine. That’s a good point. Buy for life if buying stock. Act as an investor, not a speculator.
Then what do I do?
Well, even Buffet and his former mentor Benjamin Graham call out gross P/E ratios. When a business is overvalued to a silly extent (30-40+), it’s fine to sell if that money can go to a better leveraged investment.
There are a few companies that fit that bill in my portfolio (*cough* Tesla *cough*). Where the money (and any more I venture to stick into the market) can go to Vanguard funds. They consistently do well, have dividends, and some aren’t too icky with their P/E ratios.
If I do want to gamble (ie individual company stock), use another rule of thumb: no more than 10% of total cash in individuals. That, and have a defined exit strategy if I start to “make it big” or realize “I’ve made a mistake”. It’s like taking a little money to the casino and serves the same purpose of having fun 🙃
I’ve covered that I’ve gotten lucky in the short-term, but have under performed in the long-term looking for my unicorns. In conclusion, I can say for me and most others seeking to invest, unicorns are very rare and far between, much like investors Graham and Buffet.
Going forward, I’ll put the time of searching for unicorns into rebalancing my portfolio into a Vanguard diversified ETF spread 👍
Have you found a unicorn before? Do you have one now? Why do you think you’re one? 🤔 Keep me posted – I’d like to hear your investment lessons if they’ve worked out for awhile 😉